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Collections on Your Credit Report

When an account becomes seriously past due, the creditor may decide to turn the account over to an internal collection department or to sell the debt to a collection agency. Once an account is sold to a collection agency, the collection account can then be reported as a separate account on your credit report. Collection accounts have a significant negative impact on your credit scores.

Collections can appear from unsecured accounts, such as credit cards and personal loans. In contrast, secured loans such as mortgages or auto loans that default would involve foreclosure and repossession, respectively. Auto loans can end up in collections also, even if they are repossessed. The amount they are sold for at auction may be less than the full amount owed, and the remaining amount can still be sent to collections.

Collections can be removed from credit reports in only two ways:

  1. If the collection information is valid, you must wait 7 years from the original delinquency date for the information to cycle off your credit reports. The original delinquency date is the date the account first became delinquent and after which it was never again brought current.
  2. If collection information is inaccurate, you can file a dispute on the collection information in your credit report. Depending on what the inaccuracy is, the collection account may be updated rather than removed. Learn more on how to dispute credit report information.

What “Going into Collections” Means

Depending on the type of debt owed, collections can affect you in different ways. If your debt is unsecured, such as credit card debt, and you default on your payments with that debt sent to collections, the credit card company would stop trying to collect the debt from you. Instead, the collections company that your debt was sent to, would pursue the debt and try to collect money from you. If your debt was secured, such as an auto loan and you default, then the lender might repossess your car, sell it at auction, and sell the remainder of debt you owe to a collections company. Lenders can collect money from debt in the following ways:

  • Contact you on their own and ask for payment using their internal collection department.
  • Hire a collection agency to try and collect.
  • For revolving debt, such as credit card debt, the credit card company could sell your debt to a collection agency, which would then try to get the money from you.
  • For installment loan debt, such as an auto loan, the lender may repossess the car, sell it auction, and then sell the remaining debt to a collection agency.

The federal Fair Debt Collection Practices Act strictly regulates how debt collectors can operate when trying to recover a debt. For example, they can’t threaten you with imprisonment — or make any other kind of threat,— if you don’t pay. However, they can — and typically do — report the unpaid debt to credit reporting agencies.

What Happens When an Account Goes into Collections?

Step by step, here’s what happens when you have an account go into collection:

  1. You miss or skip a credit card payment or fail to pay another type of bill, such as your phone bill or electricity bill.
  2. The creditor may give you a grace period during which to make good on the bill. Typically, it takes longer than 30 days for an account to be sold to a collection agency or placed into collection status. They’ll notify you, usually more than once, that you haven’t paid and ask you to pay up. If you still don’t pay, they can move your account into collections.
  3. At that point, the original creditor could turn the collection account over to a collection agency. Typically, this occurs within a few months of the original delinquency date, and the original account may appear on credit reports as a “charge off,” which essentially means the creditor has given up trying to recover the debt.
  4. Just because the original creditor has given up, however, doesn’t mean you won’t hear from a collection agency. Once they receive the account from the original creditor, the collection agency is free to pursue you for all or part of the debt, provided they adhere to federal regulations governing collections.
  5. If you’re contacted by a collection agency, you have the right to the detailed accounting of the debt they claim you owe. Contacting a collections agency won’t impact your credit report.

Virtually any type of unpaid debt can be sent to collection, including:

  • Credit cards
  • Student loans
  • Auto loans
  • Utilities
  • Services
  • Government
  • Medical

How Long Do Collections Stay on Your Credit Report?

Collections are a continuation of debt owed and can stay on your credit report for up to 7 years from the date the debt first became delinquent and was not brought current. However, if an account were to become late today, the payments were never brought current, it was charged off as bad debt, closed and sent to collection, then the original delinquency date would be today’s date. Even if the bad debt was eventually paid, seven years from today’s date, the closed account and the subsequent collection account would be deleted.

After seven years, that negative information will automatically drop off your credit report, even if a collection agency has assumed the debt. The clock on the debt doesn’t reset if it’s transferred to another creditor; your original delinquency date remains the same for both the original account and the collection agency account.

If you pay the debt, the collection agency or creditor will update your credit information to show that. The account will be reported as paid, but paying the debt does not cause the account to be removed, nor is it likely to result in a significant increase in scores. However, that doesn’t mean there is no benefit to paying the debt. Doing so will reduce the total amount of a debt you owe, and lenders will see that you took care of the debt. As a result, a paid collection account is usually viewed more favorably than an unpaid one.

How Collections Impact Your Credit Report and Credit Scores

Your credit report is meant to give potential lenders information on how you’ve used and managed your credit responsibilities with both positive and negative information. If you pay your bills on time and keep the balances on your accounts low, your responsible credit behavior will be reflected on your credit report. However, if you’ve paid late or skipped payments altogether, that information will also appear on your report.

Late payments, skipped payments, and collection accounts are all a factor in determining your credit scores. Any kind of negative information can affect your credit scores because lenders see such information as an indication you may not be managing your credit well, such as overspending or falling behind on payments. A low credit score could make it difficult for you to obtain future credit with favorable interest rates and terms.

A late payment on a credit report is negative, and the more recent a late payment is, the greater impact it has. Accounts that get to the collection stage are considered seriously delinquent and will have a significant and negative impact on your credit report.

Should You Pay Off Collections Accounts?

Past due collection accounts should be paid off, because you are responsible for your debt and because a paid collection account may be viewed more favorably by potential lenders than an unpaid account. Paying off collection accounts also shows that you have made good on your debts. Lenders will often require that all past due collection accounts be paid before approving a loan, such as a mortgage loan. Paying off a collection account will result in the information being updated on your credit report, but it won’t necessarily help your credit scores. Also, in some newer scoring models (FICO Score 9 and VantageScore 3.0), paid collections are either omitted from the score calculation or are weighed much less.

Unpaid collections can affect you in ways beyond lowering your credit scores. The stress of having unpaid debts hanging over your head can undermine your peace of mind and quality of life. You may even feel so overwhelmed you consider filing for bankruptcy — an action that will remain on your credit report for up to 10 years (7 years for Chapter 13).

How to Find Out if You Have Accounts in Collections

Typically, the collection agency will try and contact you and notify you of the collection account. However, it is possible you might be unaware of an account in collections action if you have moved or the debt collector has been unable to reach you, or if the debt is the result of identity theft.

The best way to ensure you’re aware of every piece of information that may affect your credit report and scores, including collections, is to regularly check your credit report and credit scores.

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